By Frank Jack Daniel and Mirwais Harooni
MES AYNAK, Afghanistan (Reuters) - China and Afghanistan remain deadlocked over a stalled $3 billion copper mine five months after Beijing demanded royalties be slashed by almost a half, underlining Kabul's struggles to support itself as foreign aid dries up.
The copper, lying beneath the ruins of an ancient Buddhist city, is one of the world's largest untapped deposits. But the project at Mes Aynak has been mired in delays since state-run China Metallurgical Group Corp (MCC) won the contract to develop it in 2007.
Tapping Afghanistan's estimated $1 trillion mineral resources is a top priority for President Ashraf Ghani who needs to fund the budget as billions of dollars in foreign aid taper off over the next few years.
But China's tough message when he visited Beijing in October reflects the daunting challenge of developing large industry in war-ravaged Afghanistan. There is no railway to get metal out of the landlocked country, roads are dangerous for travel, and copper prices have fallen 40 percent since 2011.
"So far there is no agreement. We have our position. They have their position," Daud Saba, Afghanistan's mining minister, said in a recent interview, describing the stalemate on the Aynak project. But he added: "I think most of the problems are solvable."
Mining ministry officials said this week that the situation remained unchanged.
Resurgent Taliban insurgents have tightened control over the area around Aynak, and after threats, rocket attacks and the risk of land mines, MCC withdrew its Chinese workers from the heavily guarded copper camp last year.
And then there are the Buddhist ruins. Archaeological work to preserve treasures from the crumbling monasteries and stupas is dangerous and slow, and must be finished before mining can begin.
The difficult negotiations over the Aynak deposit, an hour's drive from the capital, highlight the commercial bent to China's growing role in Afghan affairs as it seeks to broker peace talks between the government and Taliban militants.
During Ghani's visit, Beijing asked him to slash the top royalty rate on the mine to about 10 percent from 19.5 percent, Saba said.
China's demands, details of which have not been previously reported, could amount to $114 million in lost revenue for the Afghan government per year at today's prices once the mine is producing at its initial capacity of 197,000 tonnes annually.
MCC forecasts the mine could eventually produce up to 343,000 tonnes of copper a year, indirectly creating tens of thousands of jobs.
MCC did not respond to requests for comment for this article. In a financial report for the first half of 2014, the company said it "continued to facilitate relevant amendments to the mining contracts with the Afghanistan government."
The company has the rights to the minerals for 30 years, and, with few alternatives and keen to draw in more Chinese investment, Ghani is unlikely to scrap the deal.
Afghanistan's largely untapped mineral reserves include big deposits of iron ore and copper.
But with militant violence at its worst since the Taliban was toppled in 2001 and infrastructure minimal, most of the wealth will be inaccessible for years.
Aynak is Ghani's best bet.
Some progress has been made on the mine. Late last year, MCC produced a feasibility study after a three-year delay.
On the advice of the World Bank, Afghanistan asked for improvements, including a better environmental impact study. Afghanistan is waiting for the revised feasibility study to come back, Saba said.
China has presented a list of reasons the project has stalled, including a lack of coal to power the mine, insufficient phosphate to purify metal and the cost of building a smelter and railway, according to a briefing note of Ghani's talks in Beijing seen by Reuters.
Along with danger, the top reason cited by MCC for delays was the archaeological work.
Foreign and Afghan archaeologists who rushed to excavate Mes Aynak before the mine opened have now mostly left following a series of attacks that reflect a rise in militant violence across Afghanistan now NATO combat troops have left.
In June, gunmen executed eight workers clearing land mines around Aynak left from the Soviet invasion of Afghanistan.
Security has since been stepped up at the archaeological site and copper camp. Afghan forces guard dozens of checkpoints, at least one armed with a long artillery cannon, and a high sandbag wall and perimeter fence curve around the area.
Underlining how much rides on the project, Ghani made a surprise visit to Aynak in February.
During his trip to China, he agreed to raise the number of police guarding the site to 1,750 and vowed major relics would be moved by summer, according to the briefing note. After visiting Aynak, he ordered even greater security.
Aziz Wafa, who leads a small team of Afghan archaeologists willing to brave the dangers, pushes ahead with excavations.
"For the Chinese (violence) is a problem, but not for the Afghans. I was born in a war, I grew up in a war, and I will die in a war," he said at a site piled high with statues and stupas.
(Additional reporting by Hamid Shalizi and Kay Johnson in KABUL and Winni Zhou in SHANGHAI; Editing by Mike Collett-White and Raju Gopalakrishnan)